1. Field of the Invention
This invention relates to methods of and systems for accounting, and more particularly, this invention relates to methods of and systems for determining interest rates.
2. Background Considerations
It is customary for banks to expect, and frequently to require, borrowers to maintain funds on deposit with the bank equal to a certain percentage of the borrower's loan, or of a combination of the borrower's loan and the line of credit extended by the bank, or of the line of credit, only.
In current banking terminology these funds on deposit are referred to as "Compensating Balance". Compensating Balance is the amount of funds the borrower has on deposit in the lender bank, as a percentage of the outstanding loan balance, or as a percentage of the outstanding loan balance combined with a percentage of the line of credit, or possibly as a percentage of the line of credit only. Bankers refer to Compensating Balance in terms of percentages rather than dollars. For example, they would refer to a 20% Compensating Balance rather than to a $14,000 Compensating Balance.
Borrowers are reluctant to leave funds on deposit with a bank because they could be earning income with the funds if they were not on deposit. Funds on deposit are an advantage to the bank because it gives them funds which they can lend to earn additional income.
Therefore, it is an advantage for the bank to offer an inducement to the borrower to leave sizeable balances on deposit, and a lower interest rate on their loan would be such an inducement.
Large corporations usually have an officer who is responsible for investing temporarily idle funds to earn maximum returns. The instant invention would save time for this officer, because the funds could be left on deposit with the bank to reduce the interest rate on the loan, rather than the officer's having to search for a savings institution or other short-term investment for the funds. This also enhances the borrower/lender relationship.
Funds on deposit are to a bank as inventories are to a business and are expected to produce a given gross profit. The instant invention tends to stabilize funds available for lending and, thereby, stabilize the bank's gross profit.
It is customary for banks to lend money at prime rate plus points and fractional points above prime rate. For example, if prime rate is 6%, they may quote an interest rate of "2 points above prime", making the interest rate 8%. This gives the bank a gross markup of 2.5%, using the standard retail system of inventory (6 divided by 0.75 equals 8). When the prime rate goes up or down, and they add the same points, their markup percentage changes. The instant invention will be advantageous to the bank in that it offers a system for controlling their desired markup, because it facilitates the use of percentages of prime rate rather than using points. The percentages used will be established by each bank. They should tend to decrease the gross profit percentage as the prime rate increases, and vice versa.
Although the borrower and the lender may agree on an amount of Compensating Balance when the loan is initiated, lenders now have no easy way of automatically comparing total funds on deposit, loan balances, line of credit, and agreed Compensating Balance. Generally, this is done manually from average-balance figures furnished the loan officer, a time-consuming process. Also, the figures may be furnished at longer time intervals than the bank would prefer, at which time the Compensating Balance may have been below the agreed amount. The bank then notifies the borrower to increase the funds on deposit.
If banks utilize the instant invention through a computer, the computer could be programmed to notify the loan officer of irregularities in the borrowers' accounts. For example, the load officer could be notified daily (or with whatever frequency the bank desires) of borrowers whose Compensating Balance has reached the critically-low point. This also may alert the loan officer to the possibility of financial difficulty of the borrower. Additional information, not a part of the instant invention, could be furnished the loan officer with very little added expense, such as deliquent interest payments, deliquent loan reductions, and/or delinquent loan payoffs.
The instant invention will save bank personnel time by automatically relating the funds on deposit to the loan balance (or to a combination of loan balance and line of credit--see explanation of Compensating Balances on pages 8 and 9), thereby producing a Compensating Balance, and relating it to the agreed Compensating Balance, without the loan officer's having to make the manual comparisons and computations. This would enable each loan officer to handle more accounts, permitting the bank to have a smaller staff. The loan officer would also have more current information on which to make judgments.
The instant invention will improve relations between borrower and lender. The lender will be helping the borrower to keep interest rates low by notifying the borrower when the Compensating Balance is less than agreed, rather than criticizing the borrower for not maintaining the agreed Compensating Balance.